For professional advisers and paraplanners only. Not to be relied upon by retail investors.
How venture capital via tax-efficient investments can lead to good client outcomes under Consumer Duty
By Jessica Franks, Head of Investment Products at Octopus Investments
Much of the conversation surrounding venture capital centres on tax reliefs and the tax planning outcomes they might deliver.
But it’s important not to lose sight of the investment case behind having exposure to venture capital.
With Consumer Duty coming into force on 31 July, placing utmost importance on achieving good customer outcomes, advice firms can take this opportunity to review how venture capital might benefit suitable clients.
Delivering good outcomes – increasing expected returns
Dr Matthew Connell, Director, Policy and Public Affairs, at the Personal Finance Society (PFS) says “Implicit in any financial planning is a commitment to get the best possible returns for clients within their liquidity needs, risk appetite, and objectives.”
John Higginbottom, Head of Regulatory Propositions at Bankhall adds, “For the right client, tax efficient investments can help in achieving several goals, including capital growth.”
Dr Brian Moretta, Head of Tax-Enhanced Research at Hardman & Co, is an expert in venture capital and author of the report Does Consumer Duty oblige you to add venture capital to client portfolios?
He adds, “Consumer Duty requires advisers to deliver the best outcome for their client,” says Brian. “So I believe you need to consider venture capital, even if you eventually discount it, as it can lead to a better outcome.”
“Our research shows that when you add diversified exposure to early-stage companies to a portfolio, through EIS or VCTs, this can increase expected returns. This is even the case when setting aside the impact of any tax reliefs.”
“Critically, with appropriate rebalancing, you can add venture capital to portfolios to target improved returns while managing the level of portfolio risk,” explains Brian.
Clients suitable for venture capital
Linda Preston-Todd of Bankhall says, “The key is that a target market gives quite a wide base to consider, but there may be situations where a client enters that target market after being considered an outlier.”
Matt, Brian, Linda and John advocate for considering venture capital for all clients, before discounting those clients who are unsuitable.
“This will be driven by the client circumstances,” explains John. “As well as by advisers understanding the types of investments that are available for their target audience, and being able to qualify who the product is suitable for but, also, importantly who the products are not suitable for
Venture capital is high risk
Remember that investments offering exposure to venture capital, such as VCTs and EIS, place capital at risk. Clients may not get back the full amount they invest.
The shares of small unlisted businesses are high risk, their price may be volatile, and they are harder to sell than listed shares.
There are also tax risks you must consider. Tax treatment depends on individual circumstances and tax rules could change in the future.
Tax reliefs depend on EIS-qualifying companies and Venture Capital Trusts maintaining their qualifying status.
Next steps
“If you’re not used to recommending venture capital, you must educate yourself,” says Brian. “You need to understand the benefits and the risks of tax-efficient investments and venture capital.”
“You should review your client bank to see where these tax-efficient investments can deliver value and good outcomes.” says John.
Octopus has an upcoming webinar to help you take both of these steps. Tune in to Readying for Consumer Duty with tax-efficient investments on Tuesday, 20 June at 10 am and features Matt, Brian, Linda and John who will be exploring Consumer Duty in more depth.
These investments are not suitable for everyone. Any recommendation should be based on a holistic review of your client’s financial situation, objectives and needs. This communication does not constitute advice on investments, legal matters, taxation or any other matters. Personal opinions may change and should not be seen as advice or recommendation. Issued by Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London EC1N 2HT. Registered in England and Wales No. 03942880. Issued May 2023. CAM013067.
[Main image: alexander-jawfox-ng7Yynar8Hw-unsplash]
